The day after he left South Korea, the country’s Financial Services Commission on Sept. 29 announced the “prohibition of all forms of ICOs,” including security issuance, prohibiting coin margins, financial loans and credit grants. The FSC pointed to fears that unproductive crypto speculation was negatively affecting financial markets, which made additional measures “inevitable.”

To be clear, regulators haven’t banned ICOs yet. The Sept. 29 meeting created a task force to prepare for the ban but set no dates for implementation.

Local crypto industry leaders argue that the ban is legally groundless. They fear overregulation will push local talent and currency to more welcoming jurisdictions like Switzerland, Singapore and Japan.

“We were expecting this kind of announcement, but we were surprised they used the words ‘total ban,” said John Ra, CEO of Bitcoin Center Korea, noting that the timing of announcement just before Chuseok, the long Thanksgiving holiday, prevented companies from reacting or delivering feedback until at least Oct. 10. (Likewise, the FSC was not available for comment.)

“This is a warning shot, saying, ‘This could be the direction we’re heading, but don’t ask questions.’ But I think they went too far,” Ra said.

The holiday is the quiet before a storm the local crypto community vows to create. Kim Tae-won, a director and former chairman of the Korea Blockchain Industry Promotion Association and CTO of startup Glosfer, is gathering the local ICO community to take a stance through an official government petition. Glosfer hired a law firm that has determined that ICOs cannot be penalized under existing laws. The blockchain association will then “face it head on” with the National Assembly by the end of October, Kim says.

South Korea’s cryptocurrency markets are some of the world’s largest, with the Korean won the third-most used currency to trade Bitcoin and Ethereum. Following the FSC’s ban announcement, trading prices in Korea hardly skipped a beat, with Bitcoin rebounding within hours.

The price of bitcoin in Korean won recovered shortly after the ICO ban was announced.CryptoCompare.com

There have been a number of successful ICOs this year, from the BOScoin in May to ICON in September. Momentum is picking up -- there’s even a coin just for K-pop boy band merchandise. “We say ICOs are so popular even farmers would do one,” Kim said. Glosfer raised 15 billion won ($13 million) in an ICO pre-sale Sept. 25, days before the ban was announced, and is sticking to plans for a global ICO next January to raise 35 million won more. The company’s coin Hycon is raising funds for a project to simplify the blockchain creation process for those with no technical background.

Kim claims the ban was rushed, perhaps due to an internal deadline and pressure from higher-ups, with regulators approaching cryptocurrencies as if they were all pyramid schemes. “We’re not even slightly afraid of what has come from the government,” Kim said. “I can guarantee the final regulation will not look like what the government is proposing.”

The Ponzi Problem

There were valid reasons for concern, with digital coin-related schemes targeting the elderly dating back to 2013, Kim explained.The FSC, in the name of preventing consumer loss and a fallout in the real economy, on Sept. 1 sought to ban crypto-based issuance of securities and prohibited crypto traders from giving credit grants while establishing a crypto crime task force.

Since then, the FSC has acted quickly to crack down on scams. Twenty individuals were arrested for “multilevel fraud” and similar crimes by Sept. 15, the FSC said. Four people were prosecuted after a company called 00 Coin stole 21.2 billion won in scams this year, while five people were prosecuted for selling 1.25 kilograms worth of marijuana via bitcoin since August 2016. Another four people were arrested for scamming 1,000 investors out of 25 billion won through fake cryptocurrency sales through unregistered multilevel companies, the regulator said.

Regulators considered ICOs an “imminent threat” to individual investors, according to Lee Seung-gun, chairman of the Korea Fintech Industry Association and CEO of startup Viva Republica. “The FSC shared its opinion on ICOs before and it was pretty clear […] they were going to ban all ICO financial transactions,” he said.

The FSC wants to regulate a lot more than ICOs. In the Sept. 29 meeting, regulators also resolved to prevent financial companies from getting involved in cryptocurrency transactions, crack down on money laundering, limit crypto accounts to one per person, and strengthen monitoring to prevent crypto-related drug transactions and “multilevel business fraud” -- or Ponzi schemes. It will also strengthen the user identity verification system by December to better track traders.

“The government was forced to take some form of action. We agree with this, but what angers us is that this action does not target criminals, but rather the technology,” Kim said.

Industry sources suggested a local ban would be futile as ICOs are usually set up in a third country such as Switzerland or Singapore where the Korean government has no jurisdiction, and are funded by other cryptocurrencies. The Korean government can only regulate the Korean won, as it still does not officially recognize cryptocurrencies as a currency or financial product.

“With the current situation, they can’t regulate in any form even if they wanted to. I don’t expect there to be a regulation on something that is not recognized,” said Choi Yong-kwan, chairman of the Blockchain Open Forum and vice president of cryptocurrency platform Blockchain OS.

The blockchain association argued that the ICO movement is mostly global and there are no realistic measures to control private involvement. In a statement Sept. 29, it proposed instead to regulate ICOs by assessing their business feasibility, calculating their valuations, and establishing a third party to monitor the funds.

‘Lost Decade’

The FSC noted that the U.S., China, Singapore, Malaysia and Hong Kong have begun to regulate ICOs. But the local industry claims Korea’s plan is an irrational knee-jerk reaction to follow China, which announced its ban weeks earlier, without doing its homework on its own market. The brash move reflects the regulators’ lack of knowledge of blockchain technology, and contradicts what the new Moon Jae-in government stands for, says Ra.

Even the FSC vice chairman heralded the “blockchain revolution” as equivalent to the internet revolution of the 1990s, vowing that his country would lead international trends if government, related industries and experts pool their wisdom. Ironically, Ra argues, Korea wants to ban its own developers from producing cryptocurrencies, a staple application of the technology.

“We worry that when they use such strong words and it becomes actual regulation, it could be another lost decade for the industry,” Ra said.

Kim, who recalled Buterin’s visit just days before, claimed the Korean government made countless measures to welcome him. But had Buterin been Korean, he would have been a criminal according to the new regulation. “Why does the government praise this individual while disallowing us?” he said. “The fact that Vitalik is allowed, yet Koreans aren’t, is a portrayal of Korea’s discrimination against its own people.”

A longstanding conservative legal culture may have influenced Korea, which is accustomed to “negative policies” -- don’t do until allowed -- versus “positive policies” -- carry on until told otherwise, Ra says. “But in such a new industry with technology that’s moving so fast, a negative policy system is very backwards,” he said. “If you start to do that as a government you’re going to lose out to other countries that have a positive system.”

In the end, regulators care more about preventing negative impacts on the financial market than banning ICOs, says Lee of the Korea Fintech Industry Association, the forefront fintech agency to consult with the government. He expects the final regulation will control what the legal, fiat currency can do, rather than what crypto coins can do.

Lee said if companies can show the FSC a way to promote the innovation of ICO technology and prevent its negative aspects, “there is still a chance of turning the situation into something more market-friendly.”